ECB Lends 3.9 Billion Euros to Banks, Most Since 2004

Sept. 27 (Bloomberg) -- The European Central Bank lent 3.9 billion euros ($5.5 billion) at its penalty rate, the most in almost three years, suggesting credit markets are still unable to meet banks' borrowing needs.

The three-month London inter-bank offered rate for euros rose to 4.79 percent today, a six-year high, from 4.73 percent, according to the British Bankers' Association. The increase shows that the fallout from losses on subprime mortgages is still making banks reluctant to lend to each other. The U.S. commercial paper market shrank for a seventh straight week as a Federal Reserve interest-rate cut failed to ease credit concern.

``It's likely that money markets are going to be in a state of shock for some time to come,'' said Stuart Thomson, a bond fund manager at Resolution Investment Management in Glasgow, Scotland, which manages $60 billion. ``No one knows where the bodies are buried.''

The ECB lent the cash at its marginal rate of 5 percent yesterday, the Frankfurt-based central bank said in its daily statement today. The last time the ECB lent as much was in October 2004. It didn't identify the borrowers.

The ECB has held seven special auctions to help cash- strapped banks since Aug. 9. The central bank's inability to restore confidence in the money markets may prevent it from raising the region's benchmark interest rate, said David Page, an economist at Investec Securities in London. The ECB is scheduled to announce its next rate decision on Oct. 4. The key interest rate is currently 4 percent, 1 percentage point below the rate at which it loaned the cash today.

``While illiquidity remains and money markets continue to function improperly we do not believe the ECB has any desire to rock the boat,'' said Page.

U.K. Banks Reluctant

In the ECB's seven-day refinancing operation on Sept. 25, the difference between the rate of the lowest accepted bid and the central bank's benchmark widened to the most since Aug. 9, when the ECB lent $130 billion. The spread widened to 27 basis points, or 0.27 percentage point, from 15 basis points at last week's operation.

In the U.K., banks have been reluctant to turn to the Bank of England for emergency funding on concern it would fuel speculation they are having financial difficulties.

London-based Barclays Plc, the U.K.'s third-biggest bank, last month denied it faced liquidity problems after twice tapping the central bank's emergency overnight-lending facility.

`Remain Skittish'

A 10 billion-pound ($20 billion) auction of three-month money at a minimum rate of 6.75 percent by the Bank of England yesterday failed to generate any bids. Banks either had enough cash on hand or were reluctant to be seen to borrow at such a penalty rate, said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt.

``Institutional lenders are likely to remain skittish in this environment,'' said Lena Komileva, an economist in London at Tullett Prebon Plc, the world's second-biggest interdealer broker. ``There is no quick fix in the pipeline at least until the year-end.''

The overnight rate for euros fell 18 basis points to 4.17 percent, the BBA said today, while the corresponding rate for pounds climbed 14 basis points to 5.8 percent. The three-month rate for pounds dropped 1 basis point to 6.31 percent.